The ‘rediscovery of poverty’ in the mid-1960s prompted a wide-ranging debate over how the British government could best support low-paid workers and their families. Historians’ attention has largely focussed on the formation of the Child Poverty Action Group and its long campaign to persuade Harold Wilson and James Callaghan’s Labour governments to introduce a universal Child Benefit. The most radical response to the poverty problem, however, came from the Conservative government led by Edward Heath, which published plans to replace the whole system of personal tax allowances with reversible tax credits. This article examines the origins of the Heath government’s Tax Credit Scheme, which promised both to reduce the cost of tax administration and to alleviate the ‘poverty trap’ created by means-tested benefits such as Family Income Supplement. It argues that the development of the Tax Credit Scheme in 1971– 2 signalled the abandonment of the selectivity agenda with which the Conservatives had taken office in 1970, and so can be seen as one of Heath’s many ‘U-turns’. As the plans took shape, however, the cost of introducing the reforms on a no-losers basis became a source of growing concern within the government. Treasury officials were therefore relieved when Labour’s victory in the February 1974 election made it possible to jettison the scheme and retain the cumulative Pay-As-You-Earn system.